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Issues:
- Treatment of interest receipt earned during pre-operative period from capital work-in-progress as business income and income from other sources respectively. Analysis: The appeal involved a dispute regarding the treatment of interest income received during the pre-operative period by the assessee. The interest income of Rs. 1,72,42,199 comprised amounts from advances to contractors and New Mangalore Port Trust (NMPT). The AO treated the interest income as 'Other sources,' while the CIT(A) differentiated between the two amounts based on Supreme Court rulings. The CIT(A) held that the interest from advances to contractors should be treated as business income following the Bokaro Steel Ltd. case, whereas the interest from NMPT should be considered income from other sources based on the Tuticorin Alkali case. The assessee contended that the interest income should be adjusted in the pre-operative expenditure or work-in-progress of the refinery expansion project. The CIT(A) upheld the business income treatment but did not direct the adjustment in work-in-progress. The Tribunal agreed with the assessee that the interest income from advances to contractors should reduce the cost of construction, as per the Bokaro Steel Ltd. principles. Therefore, the Tribunal directed the AO to adjust Rs. 68,36,851 in the work-in-progress. Regarding the interest on advances to NMPT, the Tribunal considered it as business income due to the direct link with the assessee's business, as per the terms of the agreement with NMPT. In conclusion, the appeal was partly allowed, with the Tribunal modifying the CIT(A)'s order to adjust the interest income from advances to contractors in the work-in-progress. The interest income from advances to NMPT was also treated as business income, not income from other sources, and the AO was directed to rework the income accordingly.
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